Watch HowardCohodas Trade Index Options Credit Spreads

[HowardCohodas]

Can you see that any performance measurement needs an absolute and consistent denominator to make it meaningful?

I presume you better understand the issue based my detailed analysis and on a later post of yours.

I can see how very risky trades that work out will boost the performance for one month. Any CEO that needs to make monthly reporting understands this very well.

And it seems quite difficult to hide this subterfuge month after month after month.

 

[Hotch]

65% not 6.5% in four months. That is also compounding results. That's why I believe month month return presents a more honest picture.

However, consider that the number of spreads in play at the current time is 13. And the funds are not equally divided.

Ok I'm confused again.

Let's say you risked $10,000 on every trade (I know it varies, and compounding is being ignored), you'd of made $6,500, or $65,000?

 

[robster970]

That's really close. My quibbles are small.

The overall performance of the account should be understood as the result of compounding. That's why I now believe that month on month performance is more meaningful for a cash flow strategy.

I would think that expectancy could be figured out by looking at the probability of winning and the average win and the probability of loss and the average loss. I don't see any need to include account size here.

That I'm not covering money management is quite right. Not sure what trade management particulars you are referring to.

A couple of things back then Howard:

a) You are essentially on a per trade basis, showing the per trade risk:reward ratio, expressed as a percentage and nothing else. It makes sense to sum this monthly. It makes no sense to have this as a compounded value though. What value is there in a compounded version if we don't really know the absolutes of what is being risked?

b) Expectancy is easy. We know the win/lose rate. We can sum the wins, the loses and then do the arithmetic. However the expectancy is in relation to your capital at risk and not account size.

c) Trade mgmt refers to HC's rules on how to apply discretion to trades going off-side (see point 3 of MR's post) -this one

 

[HowardCohodas]

Ok I'm confused again.

Let's say you risked $10,000 on every trade (I know it varies, and compounding is being ignored), you'd of made $6,500, or $65,000?

I thought you were again referring to my account. I was better off keeping quite here.

Although I now avoid talking about the account performance except in the special circumstance I outlined earlier, I somehow felt it necessary to point out the 65% figure was due to compounding. I should have refocused on spread results as spreads or as part of an Iron Condor.

Sorry for the confusion.

If a spread had $10,000 at risk and it returned 8.8%, then it returned $880.

 

[HowardCohodas]

A couple of things back then Howard:

a) You are essentially on a per trade basis, showing the per trade risk:reward ratio, expressed as a percentage and nothing else. It makes sense to sum this monthly. It makes no sense to have this as a compounded value though. What value is there in a compounded version if we don't really know the absolutes of what is being risked?

We agree here. That's why I no longer show account percent equity for the beginning of trading, but only as a month on month performance.

b) Expectancy is easy. We know the win/lose rate. We can sum the wins, the loses and then do the arithmetic. However the expectancy is in relation to your capital at risk and not account size.

Again, we agree. If I led you to think I believed otherwise, I miscommunicated.

c) Trade mgmt refers to HC's rules on how to apply discretion to trades going off-side (see point 3 of MR's post) -this one

I'm out if the loss on capital at risk for a given spread hits 20%. With bid/ask spread and potential liquidity concerns, I allow 30% in my expectancy calculations.

One other point I don't think I've discussed before, is that if I'm right on the edge of the 20% loss when I do my evening review, and I'm prepared to bail out at market open, I do look at the overnight futures before pulling the trigger. Doing that saved me from a second 20% to 30% loss and ended up as a 3.3% loss by the end of the trading day. I'm a little concerned about suggesting this technique to those new to options trading.

 

[Hotch]

Ah, OK, this seems perfectly normal then. Good luck with it.

 

[robster970]

I think I now understand it all.

 

[scose-no-doubt]

Hi Howard. HNY and all the rest of it
One thing I'm still not sure about is whether you indiscriminately bang on the 10% credit spread based on the time to expiry - be it 60 days or whatever it was you mentioned.

 

[HowardCohodas]

Hi Howard. HNY and all the rest of it
One thing I'm still not sure about is whether you indiscriminately bang on the 10% credit spread based on the time to expiry - be it 60 days or whatever it was you mentioned.

10% combined for the two spreads that make up an Iron Condor (5% for each spread) is my target whether it is 60 days to expiration, or 6 days.

 

[scose-no-doubt]

yes I understand all that which is why I've been quiet during all this returns hubub lol.

What I still don't understand is your entry criteria for credit spreads... are your entries based solely on time to expiry and the 10%?

 

[DionysusToast]

Still makes no sense.

Let's say you have $100k

Risk $2500 to gain $160 or up the size proportionally & risk $100k to gain $6400, add in a roll & you get your 10% return in a month but you are risking 100% of capital.

This 3% risk number is not possible, not with those total returns & the r:r per trade.

In all cases, all percentages stated in this thread are the ones that look best which is why they are inconsistent.

 

[HowardCohodas]

yes I understand all that which is why I've been quiet during all this returns hubub lol.

What I still don't understand is your entry criteria for credit spreads... are your entries based solely on time to expiry and the 10%?

The other equally important factor in choosing the short strike of a spread is the estimate of the probability that I will have to bail with a loss. For this estimate I use a metric available in ThinkOrSwim called the Probability of Touching. The links in my signature to posts in this thread will give you the background of this metric.

 

[HowardCohodas]

Still makes no sense.

Let's say you have $100k

Risk $2500 to gain $160 or up the size proportionally & risk $100k to gain $6400, add in a roll & you get your 10% return in a month but you are risking 100% of capital.

This 3% risk number is not possible, not with those total returns & the r:r per trade.

In all cases, all percentages stated in this thread are the ones that look best which is why they are inconsistent.

In spite of your last sentence zinger, I will try to answer you in a civil manner.

Let's decompose your statement to elementary ideas.

I'm not risking 100% of the capital in my account. I am never "all in." I began by keeping 10% to 15% of my account in cash. Do to some wise advice here and elsewhere, I will begin raising this to 15% to 20%.

I start out with a target of 10% when you add the two parts of an Iron Condor. Because of current market conditions I can get almost 10% on just the initial spread. (Go review the Dashboard. All is revealed there).

If I get a high potential return on the first spread, e.g. 8%, I do not just look for a 2% return on the other so that it adds up to 10%. (Go review the Dashboard for examples). I usually am above 3% because, in spite of the fact that the second spread does not required additional quarantined funds, it does add some risk.

Furthermore the account return is more than the sum of the return from the two spreads making up the Iron Condor because the same amount of quarantined funds produced the two profits.

Rolling makes a significant contribution to account performance. Without rolling an Iron Condor is formed to return around 10% per cycle (7 days for a weekly and 60 days for a monthly). One Iron Condor I reported on in this thread that expired in November had 5 spreads and returned more than 50% on funds at risk.

Lastly, consider that the weeklies cycle every seven days. 8%+ with the numbers available (check the Dashboard) and my trading summary posts might account for some of what you feel "just doesn't add up." A review of this information in this thread may clear up some of the mystery for you.

Remind me where the 3% risk number came from and what it represents. I just don't recall at this instant.

 

[scose-no-doubt]

I understand exactly what you're doing now.

You say you ditched your own P model for probability of touching as TOS model gave similar values. How did you go about calculating POT and do you have details on the TOS prob of touching?

 

[HowardCohodas]

I understand exactly what you're doing now.

You say you ditched your own P model for probability of touching as TOS model gave similar values. How did you go about calculating POT and do you have details on the TOS prob of touching?

Check out FAQ in link in signature. PoT is discussed in item #3 there.

If you have more questions, ask away.

 

[Martinghoul]

As MrG (and myself) have pointed out, PoT (from the TOS doc) is a one-to-one mapping to px of the option(s), by construction. POT tells you nothing that the prices don't.

 

[HowardCohodas]

As MrG (and myself) have pointed out, PoT (from the TOS doc) is a one-to-one mapping to px of the option(s), by construction. POT tells you nothing that the prices don't.

Help me derive PoT from the prices so that I can see this better. Thanks.

Here are the links I found. Are any of them the one your read?
Sep 17 Probabilities hosted by Tom Preston
Jan. 24, 2007 Understanding Probability Numbers hosted by Tom Preston
Jan 28 Probability of Stock Touching hosted by Tom Preston

 

[Martinghoul]

Help me derive PoT from the prices so that I can see this better. Thanks.

It's based on Reiner-Rubinstein (1991). The probability of touching is given by a simple formula:
For a call: p(c) = (K/S)^(Mu+Lambda)*N(-z)+(K/S)^(Mu-Lambda)*N(-z+2*Lambda*sigma*sqrt(T))
For a put: p(p) = (K/S)^(Mu+Lambda)*N(z)+(K/S)^(Mu-Lambda)*N(z-2*Lambda*sigma*sqrt(T))
Where
z = ln(K/S)/(sigma*sqrt(T))+Lambda*sigma*sqrt(T)
Mu = (b-sigma^2/2)/sigma^2
Lambda = sqrt(Mu^2+(2*r)/sigma^2)
b - cost-of-carry rate
K - strike
S - current spot
sigma - volatility
T - time to expiry, and
N(..) denotes the cumulative normal distribution function, i.e. NORMSDIST in Excel

I hope I haven't screwed anything up transcribing the formula.

 

[HowardCohodas]

It's based on Reiner-Rubinstein (1991). The probability of touching is given by a simple formula:

I hope I haven't screwed anything up transcribing the formula.

Can you help me find the link?

Never mind. You gave it to me in an earlier link and I have it now. Thanks.

 

[Martinghoul]

Can you help me find the link?

I can point you to a book... Will that help?

It's section 2.8.6 of the 2006 edition of Collector's (aka Espen Haug) excellent reference text "Complete Guide to Option Pricing Formulas".